“What is a Creditors’ Voluntary Liquidation (CVL) and How Could this Type of Voluntary Liquidation Help Us?”
Creditors’ Voluntary Liquidation (CVL) Overview
A creditors’ voluntary liquidation is a type of liquidation that is initiated by the directors of a limited company, following a shareholder resolution. This type of voluntary liquidation allows the directors time to get the limited company’s affairs in order, before closing and working within the ‘board’ timelines.
We are addressing a creditors’ voluntary liquidation in an overview page as it is the most common and appropriate way to close an insolvent company within the UK.
A creditors’ voluntary liquidation (CVL) is a process designed to allow an insolvent company to close voluntarily. The decision to liquidate is made by a board resolution, but instigated by the director/s. If your limited company’s liabilities outweigh its assets, or the company cannot pay its bills when they fall due, then this solution could be the right choice; depending on the situation. Either way; as a director, if you are considering voluntary liquidation, you are likely to be under pressure to pay bills that your company is struggling with, and of course, each creditor wants their bill paying first. So what happens if you cannot afford to pay them?
A limited company becomes insolvent when it can no longer pay its bills when due, or its liabilities; including contingent liabilities such as redundancy payments, outweigh the company’s assets. This is a critical point in the lifespan of a company as it denotes when the directors responsibilities change from the shareholders to the creditors. It also means that the directors need to be extremely careful when considering whether to continue to trade, or not. Any director who knows that the company is insolvent and makes the decision to continue to trade, and in doing so increases the debts of the company can be made liable for the company debts.
After establishing whether your company is insolvent, the inevitable question is ‘do I want to continue to trade on or shut-up-shop’. Either way, a creditors’ voluntary liquidation may well provide you with the ideal solution for your debt problems. Whilst liquidation should always be considered as the last resort; if managed carefully, it can provide a chance for a new beginning.
A limited company is a legal entity in its own right and so the debts belong to it (the company) so a creditors’ voluntary liquidation allows you to liquidate the company and in doing so liquidates company debts, along with the limited company itself. There are exceptions to this rule, such as debts that are personally guaranteed. This is due to the limited liability status of your company and you should be wary of closing the company simply to avoid paying creditors as a creditors’ voluntary liquidation should only be seen as a last resort.
The fact that the debts belong to the limited company as a legal entity in its own right means that the directors can start a new limited company and their personal credit rating should not be affected.
If you are considering voluntary liquidation as an option please contact us immediately, as without guidance this route can be similar to making your way through a legal minefield. It can be difficult to know who to trust online, so if you would like to speak with other clients that we have helped please just ask, or you can read our testimonials page.
With a creditors’ voluntary liquidation the directors can close the limited company without the permission of the creditors and most directors who are forced to consider this option will, in hindsight often tell you that; in their opinion, this allowed them to take back control of the company’s destiny. Although the decision to liquidate the limited company is never an easy one to make. It is better being made by the directors and shareholders than having the decision forced upon them.
There are a number of business scenarios where a creditors’ voluntary liquidation may be the only solution; or part of the solution, and here a small number:
- Historic debts may have accumulated but the core of the business may be viable;
- HMRC are chasing taxes owed and refusing to accept further time-to-pay arrangements;
- Your company is insolvent and no longer appears to be viable, even if restructured;
- There has been a decline in the market for your company’s services and products;
- The directors are not willing to provide further personal funding to keep the company afloat;
- You would like to use a creditors’ voluntary liquidation as part of the restructuring of a group.
Prefer to talk? To speak with one of the team about a creditors’ voluntary liquidation and how it could possibly solve your situation call us on 08000 746 757; or use the Live Support feature at the bottom-right of this page.
Written by: Mike Smith
FEELING CONFUSED? - WE CAN RESOLVE YOUR BUSINESS DEBT PROBLEMS
- What is a CVA?
- What is a CVL?
- What is a Pre-Pack?
- What is Administration?
- What is Insolvency?
- Is this the end?
- Directors Loan Advice?
- Help with Tax Debts?
- What do you charge?
- Personal Guarantee?
- Winding up Petition?
- Statutory Demand?
A CVA, otherwise known as a company voluntary arrangement, allows you to protect your company against legal action, as with administration, but with the purpose of creating a legally binding payment plan with your company’s creditors. The cva is tailored around your company’s cash-flow so that your company’s debts can be repaid, either in part, or in full over a maximum of five years. A cva is initiated by you (the director), not the creditors or shareholders.
When used correctly, a cva can provide a perfect tool to renegotiate troublesome trade agreements whilst allowing you to trade on through a financially challenging period. This solution should only be considered if you believe your company is viable, but needs some help to trade through.
A CVL is also known as a creditors voluntary liquidation. It is a solution that allows you to close your company with or without the permission of creditors and it allows the company to write off unsecured debts. This type of liquidation is initiated by you (the director), not the creditors as the name may lead you to believe. Choosing the right insolvency practitioner can be critical when considering liquidation. Ask to speak with previous clients as testament to their services before committing to any company to carry out a creditors’ voluntary liquidation.
A pre-pack can refer to pre-pack administration or pre-pack liquidation, either way, the solution involves having a future buyer lined up to purchase the more profitable parts of the business, whilst leaving the debts behind. It is important to obtain specialist help immediately if you think this may be a viable solution for your company as strict procedures must be followed if you, as a connected person, are considering purchasing your company’s assets. Nevertheless, if your business is generating revenue producing contracts, has sizable assets or properties, but they are under threat from serious litigation or angry creditors; a pre pack administration can provide a very powerful legal solution for your company.
Administration is a very powerful legal tool that can be used to; first, stop legal action against your company and then:
Get a better return for the creditors than would be obtained via an immediate liquidation, or rescue your company from financial difficulty as it provides you with more time allowing for a rescue strategy to be put in place for everyone's benefit.
There are two key tests/questions that apply to companies when defining whether it is insolvent or not and they are:
- The cash-flow test: Can the company pay its bills when they are due?
If the answer is NO, then your company is likely to be insolvent and you should seek advice.
- The balance sheet test: Do your company’s debts outweigh the company’s assets?
If the answer is YES, then your company is likely to be insolvent and you should seek advice.
No. Insolvency does not have to spell the end for your business as there are a number of tools that we can use to secure both your future and/or your company’s future whilst protecting you fully and minimising any potential risks.
Around 70% of directors have a problem with an overdrawn directors loan account at some stage. Most commonly, the director seek advice from an accountant who tells him/her to take a minimum salary in order to keep national insurance and tax at the lowest levels and to then take dividends to supplement their income. This then causes an unpaid debt which is owed to the company. This is very acceptable tax advice until something goes wrong which could be a sharp, unexpected drop in revenues for whatever reason or a threat of a winding up petition from HMRC. The directors then become debtors (someone who owes money) to the company and any liquidator, has a duty to pursue the director to the point of bankruptcy, if the debt cannot be repaid.
In the vast majority of cases you pay us nothing at all. When an insolvency solution is required such as a cva, administration or liquidation - we get paid for all of these by completing the field work for the insolvency practitioners. This relationship benefits you in more than one way: As you may already know, once an insolvency practitioner is engaged by your company they are duty bound to work for the creditors. So once engaged, an insolvency practitioner cannot address any potential personal implications that may be directly caused by the insolvency process as it would be a direct conflict of interests for them to do so. Jameson Smith & Co puts your protection first, whilst working with the insolvency practitioners so you have full peace of mind.
A directors' personal guarantee is essentially a promissory note to pay an organisation regardless of your company failing or going into liquidation. At some stage you may have signed an agreement with the bank or another trade creditor, making you personally liable for a specific debt. Once you realise that your company is heading towards insolvency you should seek advice on how to tackle this situation immediately if you are in any doubt about what to do.
Banks will often support personal guarantees with a charge on the family home and, or a debenture usually a fixed and, or floating on the company assets.
We specialise in helping directors address their personal guarantees and providing solutions to allow the directors to exit the situation in the best financial shape possible.
Read our page on directors' personal guarantees for more information on how we can help you.
A winding up petition is the application for a forced/compulsory liquidation of a limited company or partnership. This is usually initiated by a creditor (person/business that your company owes money to). Winding up petitions should never be ignored. There can be serious implications if communication with the relevant creditor or immediate action is neglected at this stage.
A statutory demand is a documented written request, usually sent from a creditor for payment of a debt that is owed. You would have 18 days to negotiate a settlement or ask the court to set-aside (dismiss) the demand. If no settlement is made after 18 days from receiving the statutory demand you are given a further 3 days to pay in full. This is a very serious document and should not be ignored in any circumstances. After the 21 day period has lapsed and if there is no response to the document, the creditor can then petition to court for a winding up order for a debt as little as ￡750.
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